Red Hat At $1 Billion

Based on the run rates of the current quarter, Red Hat will likely reach $1 billion in annual revenue in 2011. Only a handful of companies, probably less than 20 software firms, have ever hit this milestone. Red Hat will be the first open source-focused company to break the billion dollar barrier. Certainly Richard Stallman did not envision this when he created the paradigm of Free Software. Such an event may be more in tune with what Eric Raymond, Tim O'Reilly, and others had in mind when they reframed Free Software as Open Source.

It is easy to forget how important open source is now. Open source touches us every day more than we realize. SAP likes to point out that a huge percentage of the world's commerce is tracked by their software. It's a defensible claim because SAP knows its customers. Open source is harder to quantify. You can track downloads but that does not accurately reflect use. For web servers, it is possible to quantify use. The September Netcraft survey puts the open source Apache share of web servers at 57 percent. Estimates of operating system market share, including both servers and desktops, put Linux at 1 percent or so.

But the lack of a strong link to a reported commercial transaction makes estimates of market size from companies like IDC problematic. When IDC identifies a company like VMware as the market leader for virtualization, it means that companies spent the most on VMware products. But if you take into account the use of open source products like Xen and KVM in massive data centers, web server farms, and by web application providers like Google and Salesforce.com, the CPUs running open source virtualization likely dwarfs the commercial market. Open source has an unacknowledged footprint in many other markets as well.

The biggest way that open source touches each of us is through web-based applications. Every click on the Internet is processed in some way by open source. Now imagine that open source didn't exist, and instead, Google, Twitter, NetSuite, and dozens of startups had to pay for the open source they used. We wouldn't have such a panoply of free or advertising-supported services. Startups would require much more capital. Microsoft would be a much bigger company; Sun would have remained independent.

Red Hat's growth reflects IT's embrace of open source. Red Hat has made it to a billion my selling a subscription service that provides a stable, supported, distribution of the Linux operating system. The company's premier product is called Red Hat Enterprise Linux. Red Hat's success shows that it is not just Silicon Valley startups and cutting-edge innovators who use open source. The FUD that opponents used to spread liberally is gone. The SCO lawsuit seems like a bad joke.

Red Hat makes money because companies want experts to provide support. IT executives also want to buy products, not raw materials. In Open Source for the Enterprise, I argue that to make effective use of open source, companies must close the productization gap, that is, the lack of documentation, installation, administration tools, and support in most open source. Red Hat is the most popular strategy for closing the productization gap.

The success of Linux also shows that bizarre hybrid governance models can be successful if everyone is motivated and aligned. IBM, Intel, Hitachi, Fujitsu, Oracle, NEC and others collectively pumps hundreds of millions of dollars into developing Linux. Linus Torvalds sits at the center, not all powerful, but a major factor. Powerful players used to getting their own way must get along. The culture of development is still very community-based. IBM cannot just force developers on the project and have them accepted as committers. Red Hat and other participants provide the equivalent of product management, collecting requirements and feeding them into the process. If you designed this model and proposed that one of the most important layers of software on the planet would be created and managed this way, nobody would believe it would work. But it does.

One of attractions of open source to entrepreneurs is the marketing model. Commercial open source companies allow their products to be downloaded and used. Then, when a someone using the software wants support or features for connecting the product to the world of commercial IT, a license is required. In other words, open source is bought, not sold. The expensive sales and marketing process for commercial software is replaced by the ability to download and try the software out.

But to keep growing beyond a billion, Red Hat is going to be sold as well as bought. When I spoke to Jim Whitehurst, Red Hat's CEO, earlier this year, he described how he was institutionalizing the sales of Red Hat. Every time an SAP or Oracle application was sold, every time a server was sold by Dell or Hewlett Packard, every time a major consulting product was sold by IBM, Accenture, or Capgemini, Whitehurst wants Red Hat Enterprise Linux and its other products in the mix. The company is building the sales organization to support this sort of institutionalized expansion.

Could there be another Red Hat, an open source company that makes it to $1 billion in software-related revenues? Probably not. Companies like Spike Source and SourceLabs tried to put together subscription-based models for productizing the open source stack. Both companies were attempting to combine many different open source projects into one productized offering. Neither worked out, probably because the open source software stack is not as generic and interchangable as the operating system. Commercial open source companies like MySQL haven't come close to $1 billion. When it was purchased, MySQL was probably running at less than $50 million in annual revenue. The largest of the commercial open source application companies like Alfresco, the enterprise content management vendor, are smaller than that.